Brazil Swap Rates Rise as Inflation Accelerates; Real Advances

Brazilian swap rates rose as Sao Paulo’s inflation accelerated in December more than economists forecast, spurring speculation that the central bank will raise borrowing costs from record lows.

Swap rates on the contract due in January 2017 climbed seven basis points, or 0.07 percentage point, to 8.49 percent at the close in Sao Paulo, the first increase since Dec. 20. The real appreciated 0.7 percent to 2.0325 per dollar, the strongest level on a closing basis since Nov. 6. The currency advanced 0.7 percent since Dec. 28 in its third weekly gain.

The real advanced to an eight-week high on bets policy makers will allow the currency to strengthen to contain inflation. A U.S. report today showed sustained gains in the labor market, boosting the prospects for the world’s largest economy and encouraging demand for emerging-market assets.

“Swap rates are rising because the inflation index was higher than expected,” Vladimir Caramaschi, the chief strategist at Credit Agricole SA’s Brazilian unit in Sao Paulo, said in a telephone interview.

The FIPE consumer price index for Sao Paulo rose 0.78 percent in December after climbing 0.68 percent in the prior month, the Foundation Economics Research Institute reported today. The median forecast of 17 analysts surveyed by Bloomberg was for a 0.70 percent increase.

Brazil’s annual rate of consumer price increases as measured by the benchmark IPCA index has exceeded the 4.5 percent midpoint of the central bank’s target range for 27 consecutive months. Inflation unexpectedly accelerated to 5.53 percent in November from 5.45 percent the month before, the statistics agency reported Dec. 7.

Industrial Output

Sao Paulo’s inflation data overshadowed a report today showing Brazil’s industrial production fell in November for the second time in three months.

Industrial output declined 0.6 percent in November after rising 0.14 percent in the prior month, the national statistics agency said today in Rio de Janeiro. The October increase was revised from a previous reading of 0.9 percent.

“Industrial production data was really bad,” Andre Perfeito, the chief economist at Gradual Investimentos, said by phone from Sao Paulo. “It reinforces the idea that there was a slowdown in the Brazilian economy at the end of last year.”

Policy makers left the target lending rate at a record low 7.25 percent in November after 10 consecutive reductions since August 2011 to support growth.

Brazil’s economy increased 0.98 percent in 2012, according to the latest central bank survey of about 100 analysts at financial institutions, after a 2.7 percent expansion in 2011 and 7.5 percent growth in 2010.

Fed Signal

Swap rates also rose today after the Federal Reserve indicated in minutes of its December meeting released yesterday that it will probably end its policy of bond purchases to support the economy this year, driving U.S. Treasury yields higher and prompting investors to demand higher returns for holding Brazilian assets.

“Brazilian rates have to follow rates abroad,” Caramaschi said. “Otherwise there would be an opportunity for arbitrage.”

The yield on the benchmark 10-year Treasury note was little changed at 1.91 percent after increasing eight basis points yesterday following the Fed minutes.

Brazil’s central bank has swung between selling currency swaps to prevent the real from falling too quickly and offering reverse currency swaps to protect exporters by keeping the real from strengthening beyond 2 per dollar.

The real has gained 1.8 percent since Dec. 20, when Carlos Hamilton, the central bank’s director for economic policy, said policy makers consider an exchange rate of 2.05 per dollar as more “adequate” when creating economic forecasts than 2.10.

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